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IDB plans several options to raise financing

As demand increases for financing in member countries impacted by the aftermath of the global financial crisis, the Jeddah-based Islamic Development Bank (IDB) is considering several options to raise financing as part of its resource mobilization strategy. According to Mohammed Tariq, head of treasury at the IDB , the "zero risk Weighting assigned to the IDB under Basel II and EU Parliament directives and the AAA ratings by all three principal international credit rating agencies, means that the IDB is well-placed to attract strong investor demand for its credit."

During a recent visit to London, Tariq outlined the multilateral development bank of the Muslim world's latest funding strategy. This includes operational assets of the IDB to grow by approximately 30 percent per annum during the next 3 years and 15 percent thereafter. The IDB will raise funds from the market to diversify its source of long-term capital and reduce its reliance on equity subscriptions. In fact, the total funding requirement of the IDB over the next 5 years, according to Tariq, is currently estimated at $5 billion with the proceeds to be used primarily for project financing.

Similarly, the IDB 's capital markets strategy is aimed at developing a liquid securities market in the Islamic finance industry as part of IDB 's wider strategic objectives; enhancing the multilateral development bank's profile in the international capital markets; and the creation of eligible assets that can be used as asset backing for the trust certificates (Sukuk). Tariq also revealed that the IDB is set to increase its capital by ID650 million (Islamic dinars 650 million) over the next two and a half years. The IDB is expected to issue its latest global Sukuk offering very soon. The issue size was initially proposed at $500 million but according to Tariq there is a good chance that this may increase to $750 million or even $1 billion. "The minimum amount for the Sukuk is $500 million which is the same as our previous issuance. We hope that the upcoming issuance will be larger. But this will depend on market conditions including enough liquidity in the market, the currency and the quality of the assets," he explained.Investors and issuers in the aftermath of the credit crunch and the global financial crisis are much more aware of cost and pricing of Sukuk. The subsequent Sukuk market slowdown in 2008 and first quarter 2009, stresses Tariq, is a "sign of maturity" and not as a result of a market bubble and therefore correction. He concedes that the statement of the Shariah Committee of AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) on Musharaka and Mudaraba Sukuk released in March 2009 is a marginal issue, but it did contribute to the slowdown in the market. But as an issuer the IDB , suggested Tariq, has a lot going for itself. It has a 100 percent sovereign ownership and support; a robust and well-diversified asset portfolio; a very well-capitalized and financial self-sufficiency; conservative risk management principles; zero percent risk weighting (Basel II) and "AAA" rating from all three major agencies; it is an emerging, supranational borrower in global fixed income markets; a leader in developing/promoting Islamic financial markets; and has a stable funding program across a broad-based product suite.

The IDB is issuing the latest Sukuk as a tranche under its $6 billion Sukuk and MTN Program partly aimed at helping member countries to mitigate the impact of the global financial downturn and the rise in commodity prices. At least 25 of the 57 member IDB member countries are classified as Least Developed Countries (LDCs), which include some of the world's poorest nations. Tariq confirmed that HSBC , Deutsche Bank and BNP Paribas have been appointed as lead arrangers, with Malaysia's CIMB Group and Bank Islam Brunei Darrusalam as co-lead managers.

The IDB sees much demand for US dollar and euro issuances but this will depend on the profit rate and the strength of the currency because it will impact on the cost of funds. "We are considering doing a euro-denominated issue. It is very much on the cards that we will launch a euro Sukuk during 2010," added Tariq. The IDB is also considering issuing a number of papers in local currencies and is in discussions with the Monetary Authority of Singapore (MAS) in this respect.

The IDB may also issue something in sterling primarily to help the liquidity management of UK-based Islamic banks.

Similarly, the bank may utilize other means to raise smaller amounts for specific projects or reasons. In fact, the IDB is currently discussing two deals to raise finance of about $50 million each through a private placement or club deal. The IDB is a highly liquid MDB institution with an authorized capital of S$46.32 billion; subscribed capital of $23.277 billion of which $5.094 billion has been paid up and of which $16.521 billion is callable.

By Mushtak Parker

© Arab News 2009